There’s been a lot of hand wringing about a looming “retirement crisis,” based on studies that project future retirees will have less money to spend in retirement compared to their working years. And indeed, many of these studies conclude that most pre-retirees haven’t saved enough money to reach a common goal for their income in retirement—to replace 70% to 80% of their gross, pre-tax pay while they were working.
Is this outcome really a crisis? Let’s dig deeper.
The common retirement income replacement target of 70% to 80% of your working income assumes that retirees need the same amount of after-tax, spendable income in retirement as they had in their working years. FYI retirees typically need less gross, pre-tax pay in retirement for a few important reasons: Their taxes will reduce in retirement, they’re no longer saving for retirement, and their work-related expenses will reduce as well.
One thing that’s important to note is these common retirement income targets assume that “maintaining your standard of living” is the same as “having the same amount of money to spend in retirement.” And indeed, some retirement researchers use this assumption to reach their conclusions about a “retirement crisis.”
However, it’s doubtful that retirees define their standard of living in the same way. Most likely, retirees will report that their standard of living hasn’t reduced if, compared to their working years, they’re living in a home and community that meets their needs, they’re able to do the things they want to do, and they aren’t struggling financially. And many retirees might think that their life has even improved since they don’t have to work anymore.
A recent study of retirees by the Employee Benefit Research Institute (EBRI) shows that the most important goal of retirees isn’t “having the same amount of money to spend in retirement.” Instead, retirees overwhelmingly report that “maintaining health and wellness” is the most important goal, with 81% saying it’s important or extremely important, followed by “spending time with family and friends,” with 68% saying it’s important or extremely important. And the study showed that these goals become more important for older retirees compared to when they first retired.
The EBRI study also shows that more than two-thirds of retirees (69%) report that their standard of living was the same or higher in retirement, compared to when they were working. A little less than two-thirds of retirees (61%) report that their spending is about right for what they can afford. And almost two-thirds of retirees (65%) report that they would reduce their spending if the value of their assets decline due to market conditions.
In other words, many retirees can be resilient and flexible and still be satisfied with life. In fact, the EBRI report shows that 80% of retirees report their satisfaction with life as above average. The most satisfied retirees report that their health is excellent. On the other hand, the least satisfied retirees report unmanageable or crushing debt.
Of course, the EBRI report shows statistics for a broad group of people, whereas the most important statistic for you is your life. However, the EBRI report can help you focus your planning on the big picture: Make sure you have enough retirement cashflow to cover your living expenses for the rest of your life, no matter how long you live, manage or reduce your debt in retirement, get serious about maintaining or improving your health, and nurture your relationships with family and friends. If you’re married, make sure both of you are taking steps to meet these goals.
Take steps to improve your life, recognizing your goals and circumstances, and you’ll significantly reduce the odds that you’ll have your own “retirement crisis.”